Monday, January 25, 2010

There must be more than a few people humming the old Clash tune with regularity these days. Not that there's anything wrong with that- it might be Macro Man's second favourite Clash song after London Calling- but consider the following:

* Bankers, hedge fund/private equity managers, and similar "leeches on society." In both the US and UK, people in our industry fall somewhere below "open vats of raw sewage on a hot day" in terms of popularity and garnering public sympathy. While the public's anger is certainly understandable, it doesn't mean that it is universally justified, as there appears to be little distinction drawn between those who necessitated a bailout, those who benefited indirectly from bailouts/easy liquidity, and those who have just gotten on with things and would have been successful regardless of circumstance.

The increasingly onerous tax/regulatory regimes being put in place (little looks set to change after the UK election) must have a number of people and firms looking longingly at more finance-friendly regimes, be they in Switzerland, Asia, or even Canada. (Those who wish to respond "good riddance!", "we're happy to do without you", and "don't let the screen door hit you in the ass on your way out!" should consider their viewpoints pre-emptively noted and thus not necessary to re-post.)

* Equity longs. What a long strange trip it's been for stocks, but per the posts of the last week or so, it feels as if a sea change has taken place. The reaction to earnings, China, Greece, and Obama has been underwhelming, to say the least, and price action suggests that we are now in liquidation mode. Thus far, however, the downmove has largely been a speculative or at least futures-driven phenomenon. E-mini's generated their two largest volume days since 2008 on Thursday and Friday, while cash volumes, though decent, were nowhere near that kind of extreme.

The key question for equities in what could prove to be a tumultuous week is whether individual stock holdings begin to see more forceful liquidation, or whether futures shorts get squeezed. If the sea change theory is right, it will be the former and long holdings will go.

* Ben Bernanke. Ah, Ben. While most assumed that he his confirmation for a second term as Fed Chairman was a foregone conclusion, over the past 72 hours his fate has been the hottest of hot topics. Over the weekend Macro Man received a flurry of emails on the subject, with Saturday's basically saying "he's toast" while those of the past 24 hours suggest that he may be able to stick around after all.

His term expires on January 31, which means that the issue really ought to be be resolved this week (though it won't necessarily be. He will remain a Fed governor and can act as de facto chairman if the vote doesn't occur.) Still, it makes this week's FOMC meeting extra spicy (though no real change is expected) and should provide an interesting gauge of just how much pressure Congress is feeling from its constituents. (As an aside, Tim Geithner is probably humming the tune as well. He must feel Volker [literally] breathing over his shoulder....)

One could extend the analogy even further, to Greece (should I stay in the euro or should I go) and China (should I stay rigidly pegged to the USD, or should I let the RMB go?) Macro Man will save those analyses for another time...

57
comments:

dblwyo
said...

MM- fair points on the regulatory resurgence but have you ever seen "Flock of Dodos" - about the relationship of evolutionary biologists to public understanding in the creationists debates? The creator makes the point that if scientists want their opinions to count they have to get speak up comprehensibly in the public square.The questions for Finance are is it socially justified as an efficient allocator of capital, is it effectively run as a business and, depending on the answers, what are the alternatives to better protecting society. Sadly the business case on both the public and private side aren't very good:Comes 'round, Goes 'round: Hastening Forward Slowly to Finance Reform If you'd like a bigger picture of the situation then try Banks As Businesses: Performance, Reform and Blindsidedness

MM, you will certainly have more luck with personal tax regime in Asia (HK or Singapore), where you will essentially pay the US federal tax rate.You will however see your kids less (as the market action is mostly our of the time zone)

From a regulatory standpoint it really depends where your capital base and leverage/balance sheet comes from. If your investors are mainly US and Europe Institutional Investors, I would not be surprised if EU/US located fund management company becomes a requirement.If your leverage / prime brokerage comes from a European / US institution, expect similar restrictions.

Finally, even if they are awash with money, getting funding / balance sheet from pure Asian institutions is more challenging than most people think.

This being said, life is nice here, there is no snow and public transportation works well.

I don't quite want to go so far as to say "don't let the screen door hit you in the ass on your way out!", but I do believe that the financial sector (worldwide) has grown too large relative to the economy, and wonder how much of its activities actually serves a useful purpose. I wouldn't mind seeing a significant percentage of the industry disappear (if that bothers you, you may take that as having your competitors disappear :) ).

What I find so odd about this is that there is a big difference between the systematic risk of MM type prop and that of the more illiquid businesses. I am seriously concerned that in a fit of public outrage / dissatisfaction with TimG we're going to see the baby thrown out with the bathwater here, possibly making a lot of markets less liquid rather than forcing more of the OTC / illiquid world onto organized exchanges thus improving the situation.

Call me crazy but I don't trust a lawyer president and an angry general public to do the right thing here.

MM - I think you do a fine job of setting the tone on your blog which keeps the polemics and the nutters out.....anyway

You say that the price action suggests liquidation in equities but to me, the liquidity in futures and lack of any massive volume in cash equities,suggests it's actually just longs knocking out a lot of beta against their single stocks. Am I missing something ?

Can't we call the market's (or those public "servants" who would threaten us with it) bluff just once. In 2008, the world was going to end if Hank Paulson didn't get his $700 billion, then the end was near if Time Geithner wasn't confirmed, and now it's BB's turn.

Let's see what happens--I'll bet it's nothing. . . The market will do what it's going to do, with or without the Princeton professor.

Seeking culprits I d suggest not forgetting the settlement systems dysfunctional design & their ignorant day in day out operation coupled with complete lack of knowledge about these; that allowed much of what went/goes on…

To now force the golden boys off exchange, besides removing the score bag of their daily manipulations of all sorts, is to allow Buffet to mark his “investment” to a(nother) model.

JPM and their swaps on the other hand …

When the sun and the moon align in a “proper way” then the capital tide reversal will shrink primarily NY (& other western hemisphere seated) banks - “to fit”.

If people were not so greedy, they would think twice before buying the property market at any price. They simply speculated in property market to make a quick return. Human greed is guilty.

Now they blame the banks, when the poor bankers have just done their work by supplying the loans and diversifying their risks through international investors. The property buyers should recognize their fault. They hadn’t complained when they got their loans approved, did they? So why do they blame the bankers for playing the game and following instructions from the government? Bankers worth every penny of their bonus. (except the one bailed-out by the government). They are simply jealous

On Bernanke my sense is that this is all theater, he is very unpopular on Main Street (20% approval, last I saw) and it's just good politics to take a swipe at him. But he was installed by a Rep president and endorsed by a Dem president and conventional wisdom is that he pulled our fat out of the fire, so I'm not losing sleep over this one.

MM: I don't agree with much of what Gary writes, for example, but I don't tell him to piss off.

Damn ... Macro Man doesn't love me anymore.

I never said ALL bankers were evil, but a few senior managers are (some are crooks, some are inept). But I did not say its 100% their fault.

I said many times the blame for the crisis should be shared by the Treasury and Fed (and BoE). I said the blame should also be shared with the likes of Chris Dodd, Barney Franks and Nancy Pelosi.

But this is the US/UK -- politicians never assume responsibility for anything they can blame on someone else. It is not fair, but we all have to invest based on how the world is, not how it should be.

"Consumers" are not innocent either, as MM constantly points out. But "consumers" are a far more diverse group than bankers. While 30% (plus or minus depending on whom you ask) are behind on their mortgages, that means 70% are not.

The 70% who are not behind are being forced against our will by crooked Treasury Secretaries to bail out all banks, regardless of the banks merit. The same 70% have found they can't get a new loan from a bank even if they have a perfect credit score -- the banks through all their customers out with the bath water, even the good customers. Credit card and ATM fees are up for all consumers, dead beats and loyal customers alike.

Be honest MM -- most (70% or so) consumers are a better credit right now than the banks. We are even solvent without taxpayer support. It doesn't matter how many times Paulson/Geithner claim the banks are "well capitalized", they said that about Lehman, Bear, FNMA, Wachovia, Countrywide, IndyMac, etc, etc.

In the "do unto others as you would have them do unto you" department, the 70% of bank customers who pay their bills don't like the way banks are treating us. Especially the ones we know are insolvent, all protests from Geithner/ Bernanke no longer considered.

We don't like a certain specific bank that rhymes with Soldman Gachs robbing the taxpayers with officials that behave like they are still on Soldman Gachs' payroll.

Regardless of whether or not "we the investors" agree with "we the people" -- we have to consider politics when we chose investments.

Banks screwed up. they have much of the government under their control, and use that control to get undeserved bailouts. They treat their good customers the way an insolvent bank should be treated. And then they go on TV and claim to be doing God's work while paying billions in bonuses during a recession.

If banks continue to tell the angry mob outside to "eat cake", they have no right to be surprised when someone rolls up a guillotine.

Range Trade...Risk Reduction is Desired Outcome --- Opinions from the professional community this morning are wide spread, the dissent highlights sentiment against actual positioning. From a sentiment standpoint most recognize that the a sea change took place last week with the technical breakdown, reaction to earnings, and government intervention. From a position standpoint most were running high gross and net long exposure and the immediate reaction was a dollar/beta neutral hedge with SP Futures helping explain the outsized futures over cash volumes on Thur/Fri. Point being, with the Bernanke non-confirmation mean reverting after the weekend government scramble, the hope is that risk assets stabilize allowing for less volatile price action to reduce gross exposure. This clearly highlights that the most painful trade is lower prices as single factor index hedging does little when Freeport-McMoran was -12% last week. My view is that headline risk will subside this week as Obama becomes invisible until Wed night where the State of the Union creates new stimulus/jobs buzz, Bernanke will be re-appointed and Geithner re-endorsed, and the FOMC will remain accommodative allowing for the desired risk reduction.

Gary I think there are only three visible bankers who have been at all arrogant: Blankfein, who should be fragged; Lewis, who is toast; and Dimon, who deserves to be. So one down, one to go.

The banks contributed, no doubt. But there were 310 million guilty parties, and that's just counting the US. And this isn't Jagger saying well you and I killed the Kennedys, this was, REALLY, we all did it. Except me of course.

No immediate meltdown, MM, in fact, LB sees a 2-3 day rally, but there is two-tailed risk ahead with the Friday US jobs number.

A weak number, retail and banks will sell off again on fears of a W, double dip, and $ will rally on risk avoidance, risking further unwind etc.. a strong number and the $ rallies, commodity stocks sell off on reduced demand for hedging, risking further unwind etc...

LB will be looking at the credit markets as usual, spreads have been creeping wider, suggesting that appetite for risk is waning.

Steve -- you are whitewashing the story and forgetting quite a few arrogant bankers besides Blanfein:

- Jon Thain and his $35,000 toilet- Stanley O'Neil, playing golf while Merrill collapse, getting paid millions anyway- Angelo Mozillo, who obviously spent more time in the tanning booth and the suit tailor than he did reading risk reports- The Bear Stearns gang, who were playing cards while their firm collapsed; they were paid millions too- FNMA's Franklin Raines, who was paid millions even though the accounting books were cooked-Moving outside the US, Fred Goodwin got millions for wrecking the bank, and he still collects a lifetime pension now while other RBS employees got 2 weeks severance

How many stories have we all read in the news about bankers celebrating a deal over a Morton's steak dinner and ringing up a $12000 wine bill for one table?

But lets move beyond stupid PR mistakes.

Traders make a million when the bank goes insolvent, and 15 million when the bank does well -- in other words they have no downside risk at all.

When they have a heart attack from all their steak dinners, they go to a hospital where a nurse with a decade more experience in her field gets paid $50K to save that sorry banker's life, under the guidance of a doctor who makes maybe $250K.

Why are the people who save our lives worth so much less than the guy who clears out our 401K accounts?

THAT arrogance is not restricted to just a few top bankers.

When banks ask the nurse and the doctor to bail them out (actually Paulson / Geither didn't exactly "ask" anyone) -- the bankers *STILL* make millions?

And the doctor gets sued because he wasn't able to clear all the cholesterol out of the banker's arteries before the banker's heart fails?

Anyone who actually deserves six figures (never mind seven or eight) should demonstrate a little street smarts during a recession.

Yelling out the castle window and telling the angry mob that makes your privileged existence possible to eat cake is just dumb -- and that is what bankers have done for the last year and a half.

Now the guillotines are under construction and the bankers are acting surprised?

Try spending a little of your bonus on a history book, and next time you won't be surprised

One tries to resist being melodramatic but in today’s environment it is hard not to be.

Doesn't Karl Denninger express the essence of our problems - that its just one big Ponzi scheme…..http://market-ticker.denninger.net/archives/1897-Doug-Noland-Just-Say-The-Words!.html

To quote: ..."One of the big problems today is that there are tens of Trillions of marketable securities out there – and their value depends greatly on the ongoing creation of Trillions more.

......That is the underlying reason why we must have reform. It is not a matter of one means of profit being "good" or "bad", nor of whether the financial sector is "too big." It is that the structure of finance in this country, and indeed the world, has grown into a blood-sucking vampire that creates more vampires, and thus has turned into a Ponzi Scheme.

Eventually it must run out of blood sources simply due to the fact that it continues to expand in size at a rate faster than the productive economy and yet the productive economy upon which it feeds has a limited amount of blood that can be extracted without dying.

All such schemes of creation or maintenance of "wealth" that rely not on the underlying value but on creation of more of the same are Ponzi Schemes. They all must fail because in each and every instance you must continue to find a way to make "more" of whatever you started with in order to maintain value, and as time goes on this "more" grows geometrically in support of what already exists.

We reached that limit in 2007 and that is the root cause of the trouble we got into - and remain within.

Sorry, Gary and Anon, I thought you would infer, as I implied, that the list of three are CURRENT bankers. Of course bankers have been arrogant, for krissakes. Why not trot out Mike Milken and Gordon Gekko?

So let me be clear so you can save your venom for something meatier:

BANKERS TODAY (January 25, 2010) are not being all that arrogant. And yes, I do realize that Ken Lewis is NOT A BANKER TODAY so please spare me another lashing.

@steve - one sentence you say we should "INFER" that you meant "current" bankers, but a sentence later you acknowledge 1 of your 3 examples is not current?

By your logic CURRENT homeowners haven't done anything wrong either, so how come the banks won't lend to them? Why are CURRENT customers being charged higher credit card and ATM fees to pay for NOT CURRENT banker mistakes?

If you want to argue about by-gones, why shouldn't it go both ways?

And why don't doctors, nurses, or small business owners get $40 million when they screw up?

I want my GBP350,000 pension for life, same as Fred Goodwin got!

Actually, I would rather get Jack Welch's $9 million /yr pension, since GE is technically a bank

MM, I think part of the "leeches on society" feeling arises from the fact that trading securities is inherently a zero-sum game. All well and good, and yet somehow the traders are all reaping rich rewards - where are the losers having their mansions and jets sold at auction?

There is, to be sure, value in the liquidity and price-setting functions of trading activities. Still, most people feel instinctively that the bonuses etc. being paid out are disproportionate to this value.

And then, of course, there's the suspicion that many are simply profiting from a politically rigged game due to personal connections, especially here in the states. Trade things back and forth in a rising asset market and everyone can look like a winner, even the ones left holding the underlying assets at the end. Differing models allow both sides of a trade to seemingly book it as a gain. Obviously this cannot be so since no real value is being added to the underlying by the trading.

And when, finally, the scheme comes undone as it inevitably must, the money men walk off with their cut of the swag while their shareholders or fund investors, not to mention taxpayers, are forced to pay off the bad bets.

Bankers wouldn't be held in such disregard if, like sports teams, the public could see that there were indeed losers as well as winners.

"By your logic CURRENT homeowners haven't done anything wrong either, so how come the banks won't lend to them? Why are CURRENT customers being charged higher credit card and ATM fees to pay for NOT CURRENT banker mistakes?"

Because homeowners got in over their heads, and not just the bankers. It is desirable for EVERYONE to deleverage and reduce their debt loads in a slow asset deflation while we try to ameliorate the employment situation.

We can't just forgive the debts of the profligate here, b/c those who didn't participate at the debt party will foot the bill. LB already pays massive taxes to support homeowners, bankers and cities and states that can't manage their finances. Enough is enough, and we can't inflate this away. Time to suck it up and make hard choices, at the consumer and government levels. This isn't politics, it is just sound money.

Hence, the homeowners are going to extract their pound of flesh from the bankers via taxes and outlawing prop trading at banks.

Economically, it would have been better if failed banks and bankers were allowed to fail just like the evicted home owners. Two central bankers, working at the behest of the banks, tried to cheat death

Deary-me. Those poor 70% of home-owners who have to borrow at such high rates now - how life must be so hard for them.

Gary, making the assuption that credit rates were fairly priced before and are too expensive now, are we? Furthermore that 70% took part in the property boom and if they are in Blighty sitting on a pretty decent profit.

"it would have been better if failed banks and bankers were allowed to fail just like the evicted home owners."

Agreed. LB has never supported bailouts.

"One way or another, karma will restore balance to the universe."

Agreed. LB prefers write-downs, bankruptcy and asset deflation to CB attempts to inflate/tax away the debt. Use your brain, please. The US is going to finance all this BS by putting the tax load on to a lot of business owners, doctors, engineers, software designers, venture capitalists and other people who didn't create this problem, and as a result there will be prolonged economic stagnation due to a lack of innovation and incentive to support job creation.

Perhaps financial sector employees "fall somewhere below 'open vats of raw sewage on a hot day' in terms of popularity and garnering public sympathy", but they are certainly well-compensated for this suffering ...

I am far from a revolutionary type, but it seems clear to me that what we are seeing develop is a genuine breach of the social fabric. Bankers believe they deserve to be paid exorbitant salaries and bonuses, even though they get to borrow money for free and make a spread, while it's all well and good that the rest of us are left out on the street.

The only way, historically speaking, that these types of ruptures in society are healed, in my opinion, is through sacrificial spectacles. In this case, the bankers are the virgins offered up to quell the anger of the gods. I say bring it on. They don't deserve a penny of bonus and they should be thankful that they still have jobs.

We have entered a period in which the guillotine will mean something.The only problem with this is that these periods also bring on significant political instability and, eventually, war.

I am far from a revolutionary type, but it seems clear to me that what we are seeing develop is a genuine breach of the social fabric. Bankers believe they deserve to be paid exorbitant salaries and bonuses, even though they get to borrow money for free and make a spread, while it's all well and good that the rest of us are left out on the street.

The only way, historically speaking, that these types of ruptures in society are healed, in my opinion, is through sacrificial spectacles. In this case, the bankers are the virgins offered up to quell the anger of the gods. I say bring it on. They don't deserve a penny of bonus and they should be thankful that they still have jobs.

We have entered a period in which the guillotine will mean something.The only problem with this is that these periods also bring on significant political instability and, eventually, war.

LB: The US is going to finance all this BS by putting the tax load on to a lot of business owners, doctors, engineers, software designers, venture capitalists and other people who didn't create this problem...

We know our taxes are going up to pay for Paulson/Geithner's immoral bailouts -- hence the argument that hedge funds shouldn't be thrown out with the bank mortage desk is very elitist

LB: and as a result there will be prolonged economic stagnation due to a lack of innovation and incentive to support job creation.

This is the real cost of bailing out bad banks. The $2-3 trillion stated cost is just the tip of the iceberg. Lost growth and lost opportunity will be 5-10 times as much, and because of the effects of compounding, we will never get that back

It's pretty clear that bankbashing is the flavor of the day, I mean, if a macro site can't garner a little sympathy, you know it's bad.

Let's review the players in the crisis:

The government (both parties), which strove to elevate home ownership to unsustainable levels; an overly accommodative Fed that kept interest rates too low; banks, together with Fannie and Freddie, that stood by to finance houses for anyone, no matter how inappropriate; homeowners eager get something for nothing; the rating agencies, indiscriminately flogging their AAA ratings; and a myriad of investors, ready to turn a blind eye to the dubious quality of the securities that resulted.

You can blame banks til kingdom come but if you want to give out an award to Most Guilty I'm going to vote for Fanneddie.

"We know our taxes are going up to pay for Paulson/Geithner's immoral bailouts -- hence the argument that hedge funds shouldn't be thrown out with the bank mortage desk is very elitist"

Don't be a complete wally...! You can't have an entire economic system without any UNIMPAIRED CAPITAL, which is what HFs and VCs will represent now that the banks and the GSEs are stuffed to the gills with bad paper.

HFs/VCs did not blow up the system - HFs typically operate with very limited leverage and receive no bailouts. Why you lot now want to make war on HFs as well as banks is truly beyond me. This is typically capital that was saved by investors and not pumped into housing and over-leveraged instruments.

We are in for a long slow dig and HF/VC money will be one of the few forces behind innovation in the next decade. We also need some banks to ensure that some form of revolving credit is available to solvent and profitable companies. Get a clue.

BTW, I am not a conservative, just a liberal with a brain. This isn't a political issue.

The public's anger is so bad that Ted Kennedy's seat went to a republican.

A rally from here? Only if Geithner orchestrates one with stolen money

Corporate profits simply are not there. Macro Man comments a few weeks back about the wide gap between actual earnings and the lies companies are sending out -- and even then most of the "growth" came from laying people off

Million dollar bonuses for borrowing at 0% and lending it back at 4% are over -- and so is the career of any member of congress (either party) that tries to maintain the status quo

MacroMan is out of England now -- and is really out of touch with how angry many people in America have become.

The poor are angry of course -- but so are a lot of upper middle class people who fear they won't be that way for long

Leftback: "HFs/VCs did not blow up the system - HFs typically operate with very limited leverage and receive no bailouts"

*cough*LTCM*cough*

OK, that was a bail-in, not a bail-out. But saying that HFs typically operate with very limited leverage is ridiculous, and saying that hedge funds don't get bailed out when they are EMBEDDED IN BANKS THAT DO GET BAILED OUT is oblivious

There's no way, as far as I'm concerned, that Bernanke won't be voted in.

Anyone that knows a little about the dysfunctional US Congress understands that this was all theater and that he'll be voted in.

I reckon the Congress was so busy with the health-care issue they simply forgot the deadline. When they did realize the Mass election has thrown balanced thinking out the window so the Dems are figuring out how to appear populist while at the same time see he's voted in with the bearest of margins.

While I agree with the idea of leverage limits as per Paul Krugman et al there remains the issue of concentration risk in portfolios, both of loans and supposedly liquid mark to market instruments. I think leverage limits are great but its not going to stop a dealer putting a lot of eggs in one proverbial basket and blowing up anyway due to a lack of liquidity. That is a problem and the key feature of any bad prop trading incident that wasn't outright fraud (LTCM, CDOs anywhere, Boaz Weinstein's monster basis unwind, etc).